5 Ways to settle your home loan faster

In South Africa, the average cost of a home is R1.45 million and it’s usually paid off over 30 years. This is according to Ooba, which highlights the financial significance of buying your first home. You will have to consider this cost in every budget you set out, and it will remain an ongoing debit order for decades.

The sooner you can settle this debt, the less overall interest you will have to pay towards it. With this in mind, we have a look at five ways you can prioritise your home loan repayments:

Your home loan success starts long before you apply for a home loan. For starters, you need to save up enough money to put down your initial deposit. Depending on the market, this may be around 8% of the total value of the property. For example, if you were considering buying a property for R1 million, then you would have to pay R800,000 upfront as your deposit.

Nowadays, lenders are more comfortable extending home loans with a 0% deposit. However, if you decided to go this route, make sure you understand the implications. It will take you much longer to pay off, and you will pay more overall interest on your loan.

If you choose to go with a deposit, you need to build your credit score as much as possible while you save up for this. This is because, besides considering your income and employment security, lenders will use your credit score to determine the interest rate on your home loan.

In South Africa, there isn’t a minimum score that you’re required to have in order to be approved for a home loan (read more about this here). However, the higher your score is, the better your chances will be – and the better the interest rate will be that you’re offered. In general, if you have a credit score of 600 and above, and you perform well on the affordability test, you will have a good chance of qualifying.

Once you’ve secured your home loan at the best possible rate, you can start your decades-long journey towards settling it. However, your ambition doesn’t have to stop there. If you’re willing to pay more towards your loan today, then you will be able to save both money and time.

Let’s imagine that you can afford to pay R9,000 towards your bond each month, but – due to a great credit score – you managed to secure a monthly instalment of R8,500. Instead of sticking to this, you pay the additional R500 towards you loan each month. This will ensure that you settle your home loan sooner, and you can avoid the interest you would have had to pay during that period.

The interest rate that you have on your home loan is often higher than the interest rate that you have on your general savings account. This means that your savings will grow more if it’s paid into your bond. You can also opt for an “access bond”, which allows you to easily withdraw your money when you need it – just like a savings account.

Once your loan has been settled, the home you paid off will officially be yours. The value of this investment may increase over time, and it will impact your overall wealth. It’s, therefore, worthwhile to look at your bond instalments as small savings contributions toward your future.

When you receive a raise, you may be tempted to start spending more money than you did before. This is a natural response for the majority of people – and it often happens unintentionally. However, if you’re paying off your home loan, you need to be intentional about where you allocate your raise.

Let’s return to our previous example, where you’re expected to pay R8,500 per month but you’ve decided to pay R9,000. With your new raise, you may now be able to afford R10,000 and you can arrange this with your lender.

Overall, this means you will pay over 17% more towards your home loan each month, and this will ensure that you settle it ahead of your decades-away deadline.

On occasion, you may receive a lump sum, such as a bonus from work or an unexpected inheritance. You may be tempted to spend it on a luxurious holiday or an exciting gift. However, if you can withstand the urge, you may be able to save yourself future instalments on your home loan.

For example, if you received an inheritance of R50,000, you would be able to save yourself nearly 6 instalments of R8,500. In other words, you could reduce the term of your home loan by nearly half a year. If you do the same with any other lump sums, your home loan will quickly disappear.

The above tips aim to allocate any additional income you may have towards your home loan so that you can settle it sooner. Whether you receive a raise or a lump sum, or you’re simply trying to consider a different kind of savings, it’s always a good idea to pay more towards your bond.